Some relief for Indian steel players as China plans to shut down junk cos

Indian steel manufacturers, which were under pressure due to overcapacity in the Chinese market, may find some relief. The government of China, which is the largest steel producer and consumer in the world, has laid out a reform plan to improve the high supply issue by shutting down the junk companies. In addition, major Chinese steel players have increased prices of finished steel.

Slowdown in the Indian steel industry begun after demand in China peaked out in 2011 resulting in excess supply. China accounts for around 50 per cent of the total global steel consumption and production as well. Several companies in China now are highly indebted and selling steel at huge losses just to recover the fixed costs.

According to media reports, the Chinese government has announced a special fund to support capacity cuts by providing shut down incentives, employee compensation and covering other related expenses. Analysts with Morgan Stanley expect a capacity cut of 6 per cent to 9 per cent in 2016. In 2015, around 4 per cent of the Chinese steel capacity was shut down. This may help in restoring the balance between demand and supply. Industry leader Bao steel raised prices in January for the first time in in two years.

What this means for Indian steel players? Excess supply in China was finding its way to Indian market, creating pricing pressure on local steel players. The reduction in Chinese capacity would reduce it to some extent thereby benefiting Indian steel producers such as JSW Steel, Tata Steel and SAIL. Also, the much awaited minimum import price for steel landed in India, if implemented, would further help.

However, the process may be gradual. Investors may do well waiting for the economic turnaround to be actually reflected in the company's financial numbers. In the first half, each of the three steel companies reported loss.

In the last three months, the benchmark indices Nifty and Sensex are down 12 per cent, whereas JSW Steel is up 16 per cent, Tata Steel is down by 2 per cent and SAIL is down by 24 per cent.